Weak Financial Literacy Scores Threaten a Global Education Movement

The FINRA 2012 National Financial Capability study results are due out soon and likely will show no improvement in individuals' money management skills. With so much energy being put into financial education, poor test results embolden critics and threaten a movement.

The global movement to teach kids about money in school has produced little hard evidence that the effort is paying off. That doesn’t mean it’s all been a waste of time, or that we’ll never get the results we want. But it certainly gives doubters ammunition.

In a series of financial literacy tests dating to 1997, the JumpStart Coalition for Personal Financial Literacy has found that young people’s understanding of personal finance has remained consistently sub-par. Given the energy put into financial education over the past decade, this is disheartening news.

Meanwhile, the FINRA 2009 National Financial Capability study found that only 30% of the population can do a simple 2% calculation and has even a basic understanding of inflation and risk diversification. The 2012 wave of that study will be released soon and reportedly shows no improvement.

Weak financial literacy scores have galvanized dozens of nations, thousands of nonprofits, and countless educators and policymakers in the attempt to raise the financial I.Q. of people around the world. But test scores that show no improvement are now galvanizing the opposition, which believes no amount of instruction will lead to broad improvement in the way individuals manage their money.

This lack of evidence presents a huge challenge to the financial education movement if it is ever to amount to more than a bunch of disjointed initiatives funded in large part by highly conflicted banks and other financial institutions. Unfortunately, proving long-term behavior change in a fairly new area of study can be difficult.

In my view, the effort is worthwhile. It simply makes no sense that people cannot learn to be better money managers. We have to keep trying and keep looking for a method that works. Young people are starting to understand that personal financial management is a skill they’ll need for a lifetime. We should give it to them.

In recent testimony before a Senate subcommittee on Children and Families, Annamaria Lusardi, director of the Global Center for Financial Literacy at the George Washington University, defended the financial education effort:

“Studies show that Americans who are not financially literate are less likely to participate in financial markets or to invest wisely. They are less likely to save and plan for the future. At the same time, they are more likely to rely on high-cost methods of borrowing. This is a serious problem. Remedying it is difficult, but adding financial literacy to the curriculum in schools would be a good start.”

Young people with poor financial knowledge are unlikely to learn from their parents, other adults, or peers. Only a small fraction of students currently have access to adults and peers who are financially literate.

Women, African Americans, Hispanics, and individuals with low educational opportunities have the poorest levels of financial literacy, putting them at even greater disadvantage. Only through school-based programs will this change.

Financial skills are necessary for navigating today’s complex world. This is so evident that the Organization for Economic Co-operation and Development (OECD) last year added financial literacy to the topics it evaluates in its Program for International Student Assessment. Financial knowledge now joins mathematics, science, and reading in those tests administered to 15-year-olds around the world.

Young people need to understand how to make wise financial decisions before—not after—they are faced with life-changing decisions. Most notable among those decisions is whether or not to invest in higher education.

The payoff will come, she says:

“Where you have well-informed consumers, you will find vigorous competition and efficient markets. In other words, financial literacy is not only good for Americans because it allows them full participation in society, but financial literacy is also essential for business, the economy, the country and, in this age of globalization, the world.”

What remains is to find the right delivery system—and to hold off the critics until we can start showing results.

Dan Kadlec is a journalist who has written about personal finance for TIME and other outlets for 25 years. He is the author of three books, a leading voice in the global financial literacy movement, and strategic adviser to the National Financial Educators Council.

Kadlec's latest is A New Purpose: Redefining Money, Family, Work,Retirement, and Success